Health Systems Face Headwinds, But Optimism May Be in the Air | Deloitte US has been saved
By Tina Wheeler, Audit & Assurance partner, Deloitte & Touche, LLP, and Rachel Miller, principal, Deloitte Consulting
Operating margins of between 1% and 4% have become common among US hospitals and health systems.1,2 About a quarter of health systems have fallen short of goals over the past three years, according to a survey of finance leaders conducted by the Deloitte Center for Health Solutions (see Expanding health care CFOs’ methods).
In response to financial and regulatory headwinds, many financial leaders are expanding their arsenal of tactics to maintain or improve profitability. While chief financial officers (CFOs) have historically relied heavily on cost-cutting, that strategy might no longer be enough. In addition to reducing costs through process efficiencies, some CFOs are pulling other levers to boost growth and to shore-up margins. Some of their strategic-growth strategies include digital marketing and online branding, enhanced physician networks, and efforts to strengthen patient loyalty. Revenue-growth strategies include non-traditional revenue streams and improved revenue-cycle management, according to the report.
Northwell Health is New York’s largest health system with 21 hospitals and more than 87,000 employees.3 For 2025, the health system’s revenue growth trend will likely be slightly more than 2% while its labor costs are expected to be more than double that percentage, according to Michele Cusack, Northwell Health’s executive vice president and CFO. Michele manages the health system’s day-to-day finance operations and strategies. We recently had an opportunity to talk with Michele about our survey findings, and her approach to improving margins and growth. Here is an excerpt from that conversation:
Rachel: Many hospitals and health systems continue to face economic volatility, workforce management issues, and supply chain disruptions, according to the results of our CFO survey. What sorts of headwinds are you encountering when it comes to improving operating margins?
Michele: Some of the external headwinds are getting stronger. For us, the biggest challenge is the revenue-rate trend we are seeing in aggregate from government payers and commercial insurers compared to our expense trends. The cost of labor, which makes up almost 65% of our expense base, is increasing by more than double our revenue trend. For 2025, that means we will have to become more efficient by $300 to $400 million just to maintain our current operating margin percentage. We have this trend gap every year, but it is larger than previous years with the current inflationary pressures.
Tina: What strategies do you have in place to improve margins?
Michele: Expanding access to our programs and footprint is one of our primary strategies, along with various revenue cycle and supply chain initiatives. We are also focused on optimizing the use of our existing assets. Our annual top-line growth is usually between 7% and 8%. With this growth, we generate incremental margin to mitigate the trend-gap headwinds. Most of the growth comes from building out new programs, expanding capacity, and improving efficiencies. We also look for opportunities to diversify our revenue streams. For instance, we transitioned our anesthesia resources from a purchased service arrangement to an employed model, which created a new revenue stream for us as well as the ability to control of how we staff our operating rooms. Another example of our diversification strategy is reflected in our pharmacy services. For the past 10-plus years, we have been building out our pharmacy footprint—we have our own retail and specialty pharmacy locations. Not only are we dispensing medications, but we make sure patients take them as prescribed. We wrap around care coordination activities on medication adherence for the benefit of the patient; and as a result, we can help prevent unnecessary readmissions.
Rachel: How do you measure things like the efficiency of your clinical staff?
Michele: We measure access and activity in several ways and provide that information to the practices as well as to the office management. One such access measure is clinical productivity per workday as reflected in the daily RVUs [Relative Value Units]. When measuring efficiency, we also evaluate and factor in the administrative, research, and teaching responsibilities the clinical staff perform. There is no one measure that we look at to determine efficiency.
Tina: How do you maintain a sense of culture?
Michele: There is a concerted effort to make everyone feel like they are part of Northwell. Many of our administrative functions are remote. As a result, we have created flexible workspaces to encourage and enable a hybrid work model. We have found that some of our more tenured employees tend to be highly efficient and effective when working at home and are not as inclined to come back into the office full time. We also recognize that it can be hard for newer employees to build their professional relationships without routine interactions in an office setting. Therefore, we are focused on building out more of a hoteling type of office space to create flexibility and availability of space to bring teams together more often. We hope this will lead to greater engagement and help employees feel that they are an integral part of the Northwell team.
Rachel: Technology investments are a top priority among the CFOs we surveyed. What are you investing in at Northwell?
Michele: We are investing in multiple technologies to modernize our existing infrastructure to create a seamless and connected platform that will reduce the administrative burden and friction between our customers, patients, clinicians, and team members. We are in the middle of a massive software transformation; we are migrating to a new platform over the next 24 months, and we will be moving our revenue cycle backbone and electronic health record to this common platform. We are also implementing a new customer-relationship management platform to compliment the install. These technologies will be cloud based and should make it easier for us to use [large language models] and Generative AI, which could help us create even more efficient workflows for the clinical and the administrative workforce. We expect a net positive return on investment within two to three years as we learn to optimize and efficiently use the technology in our business workflows and decommission the legacy systems.
Tina: How is Generative AI being used at Northwell, what kind of a return do you anticipate?
Michele: We are taking baby steps and don’t have any financial expectations yet. From a clinical perspective, we need to understand the regulatory landscape. We also need to consider unconscious bias and make sure that we don’t introduce any new risk. But we are starting to use it as a co-pilot as we look to leverage our data. In the revenue cycle, we can use it to see which claims are typically denied and by which payer. It can help us understand some of the nuances so we can modify our approach and reduce denials up front. We will also be looking to Generative AI to help automate some of the workflows and to reduce some of the administrative burdens in revenue cycle. Over the long term, the technology should help us reduce administrative costs in many areas including the revenue cycle.
Rachel: Can we talk about your involvement in the community?
Michele: We are here to serve the communities. We take seriously the Community Health Needs Assessment that we are required to do every three years, and we tailor our numerous programs to meet the diverse needs of the geographies we serve. Additionally, because of our experiences during the COVID-19 pandemic, we have changed how we partner with—and how we listen to the needs of—people in the community. For example, we created a Faith Leaders Forum where attendees of different faiths and cultures gather to discuss with us the needs they are seeing in their communities. In response to these discussions, we have begun incorporating mental health activities into their houses of worship and within their communities. The goal is to offer actionable tools and information that can help meet the unmet demand for mental wellbeing services.
Rachel: [Early this year, Northwell announced it was working with former New York City Mayor Michael Bloomberg to open a new high school that will focus on preparing students for careers in health care. The Northwell School of Health Sciences in Queens is slated to open for the 2025/2026 school year4]. This new high school is designed to benefit the community, but from a CFO perspective, could it also help Northwell buildhere a more diverse workforce?
Michele: It’s a combination of both. The school is focused on creating a workforce of the future. This school, located in Queens, is in one of the most diverse communities that we serve. We hope it will create the pipeline of staffing that reflects the diversity of the populations we serve as well. It also could provide these young members of the community with access to high-quality care and access to living-wage jobs. The school’s curriculum will most notably focus on careers in physical therapy, nursing, diagnostic medicine, and behavioral health.
Tina: What is your approach to partnerships, acquisitions, and alliances as a growth strategy? What do you see as the benefits and challenges?
Michele: As a CFO it’s a constant balancing act with respect to investing in the future to maintain and build margins while focusing on the evolving needs of the communities we serve. There is no one financial plan to follow to achieve this. We adapt to the circumstances and change our tactics as needed to remain a financially stable and trusted partner to the community.
Conclusion
Many forward-thinking CFOs are expanding their margin-enhancement strategies beyond cost reduction. They are embracing strategic growth, revenue growth, and capital deployment, each tailored to their unique organizational needs. Finance leaders seem to be in a prime position to champion this broader perspective. By prioritizing investments based on expected returns, implementation costs, available funds, and time to value, they can drive significant financial improvements. Looking ahead, these finance leaders could spearhead transformative changes, guiding their organizations toward greater profitability.
Latest news from @DeloitteHealth
Endnotes:
1Hospital operating margins in the United States, Definitive Healthcare, March 18, 2024
2Years after the pandemic, financial differences grow among US hospitals, Axios, April 26, 2024
4Northwell, NYC Public Schools announce Northwell School of Health Sciences, Northwell Health press release, February 14, 2024
The executive’s participation in this article is solely for educational purposes based on their knowledge of the subject and the views expressed by them are solely their own. This article should not be deemed or construed to be for the purpose of soliciting business for any of the companies mentioned, nor does Deloitte advocate or endorse the services or products provided by these companies.
This publication contains general information only and Deloitte is not, by means of this publication, rendering accounting, business, financial, investment, legal, tax, or other professional advice or services. This publication is not a substitute for such professional advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified professional advisor.
Deloitte shall not be responsible for any loss sustained by any person who relies on this publication.
Return to the Health Forward home page to discover more insights from our leaders.
